New Tax Preparer Requirements: More Than Meets the I…RS

This column is an example of why, in this age of tweets, Facebook posts, and 20-second sound bites, it’s precarious to accept the superficial. I appreciate that we’re all busy with really important things to do, but there are still issues that deserve more attention and thought in order to reach an informed decision; this is particularly important to keep in mind as the allegations and rhetoric of this highly-charged election year heat up.

In my early years as a journalist, I was a consumer/investigative reporter at a network television affiliate. So, I’m all for digging up the truth, exposing the bad guys (or gals) and putting them behind bars. I’m proud to say I actually did that once. But eventually you come to realize that most issues are not clearly black-or-white, but instead, are more nuanced. Complex. Sometimes, both sides have the same goal--they just disagree on how to best accomplish it.

Take the recent news that the Institute for Justice is suing the Internal Revenue Service for its mandate that all tax preparers must be licensed. Starting in 2014, anyone who wants to get paid to prepare taxes will have to pass a government exam, complete 15 hours of continuing education credits per year and pay a fee to the U.S. Treasury Department. Only then will they be considered a “registered tax return preparer.”

On the surface, these requirements sound reasonable. After all, don’t we all want some assurance that the individual we are entrusting with the task of preparing our tax return is ethical and competent?

“If a preparer cannot pass a basic competency test and does not take courses to remain up-to-date on tax law changes and understand his or her ethical responsibilities both to clients and to the tax system, that individual should not be preparing tax returns for compensation,” said National Taxpayer Advocate Nina E. Olson in a statement.

To bolster her position, Olsen cites the results of two separate undercover investigations by the Government Accountability Office (GAO) and the Treasury Inspector General for Tax Administration (TIGTA) which “found that there are pervasive problems in terms of return accuracy and ethics that registration, testing, and continuing education will help address.” In the case of the GAO, 100% of the tax returns contained errors; 61% of the returns completed for TIGTA’s researchers were incorrect.

Unfortunately, the part that didn’t make it on the evening news or fit in less than 140 characters is the fact that that these investigations were far from pervasive. In fact, any freshman doing research for a college paper would surely be aware that the sample is far too small to draw any valid conclusions. The GAO undercover “operation” involved having just 19 returns; the TIGTA investigation examined 28 returns.

Thus, the government’s justification for imposing new and expensive licensing requirements for tax preparers is based partly on the fact that there were errors on 36 dummy tax returns. (1)

But wait. There’s more!

These undercover investigations were not conducted at any mom-and-pop storefronts staffed by retired accountants. The mistakes were all made by employees working for “national tax preparation chains” located in “large metropolitan” areas.

Perhaps a more interesting point is that the two largest “national tax preparation chains”- Jackson Hewitt and H&R Block support the new mandates.

Dan Alban, one of the attorneys who filed the suit against the IRS on behalf of the Institute for Justice, suggests that the new requirements of both time and expense will put small, independent tax preparers out of business. Moreover, he points out that “these big tax prep firms can much more easily absorb the regulatory compliance costs.” That’s why several Wall Street analysts have predicted that the stock price of H&R Block (which prepared nearly 16% of all tax returns last year) is likely to go up in value.

Furthermore, certain professionals (who happen to have large, expensive lobbying machines working Capitol Hill year-round) are completely exempt from the licensing requirements. In particular, attorneys and certified public accountants. As well as any anyone “supervised” by such an individual. (2)

What’s wrong with this? Well, for example: Why would Fred the patent attorney be more qualified than Joan the retired tax accountant? And, frankly, I know several CPAs who only have corporate or business clients. Yet, thanks to the three initials after their names, the IRS says they are automatically considered competent to prepare my personal tax return. That’s like saying a brain surgeon is as capable of treating my asthma as my allergist. After all, they both have “MD” following their names.

“It certainly struck me as unusual that big tax preparation firms escape all obligations under these new regulations but [350,000] small preparers feel the full brunt of it,” wrote Joseph Henchman at the Tax Foundation in an online post.

The Institute for Justice, which filed the lawsuit on behalf of three independent tax preparers, labels the IRS licensing requirement as an “unlawful power grab” and “crony capitalism.”

The group claims the new mandates are unlawful because Congress has considered, but never passed any legislation specifically giving this IRS authority. The IRS is relying on something called “Circular 230,” which the Institute for Justice describes as: “a relic of the 19th century; it was passed by Congress in early July of 1884, nearly 30 years before the modern income tax…and had nothing to do with preparing income tax returns. Instead, its purpose was to prevent unscrupulous attorneys or claims agents from taking advantage of military pensioners and others who had monetary claims against the U.S. government, particularly claims for lost horses.” (3)

The Institute for Justice equates “crony capitalism” with “economic protectionism,” calling the new requirements another example “where big business benefits from the anti-competitive action of big government.”

According to Alban, the Institute for Justice isn’t against the idea of having a “certification” for tax preparers who find this desirable. Instead, it and other critics object to: 1) making this mandatory, and 2) appointing the IRS the licensing body. Both CPAs and attorneys are governed by state entities- not the federal government.

“There’s no reason the IRS couldn’t change the regulations to make it a voluntary certification,” says Alban, adding that for the sake of credibility, “someone trying to get new clients might want to get these certifications.” It would be similar to getting a “certified financial planner“ designation--the difference is that you’d be certified by an independent board as opposed to the federal government. (4)

The law of supply and demand tells you that if there are fewer individuals preparing tax returns, prices are going to increase. That could mean that those who can’t afford to pay more will probably decide to do their own tax returns. (Then watch what happens to the error rate.)

But the more fundamental question is: Why do more than 60% of American taxpayers- 87 million of us- have their returns prepared by someone else each year?

By the way, this includes IRS Commissioner Douglas Shulman who admitted in an interview in 2010 that he finds tax code complex and uses a preparer. And who can forget the embarrassing revelation a few years back that Treasury Secretary Timothy Geithner made several errors when computing his own tax return?

Why do individuals and businesses have to waste millions of dollars each year just to comply with the tax code? In her 2011 report to Congress, Olsen lists “the complexity of the tax code as the most serious problem facing taxpayers and the IRS alike.” By the close of 2012 the Internal Revenue Code (IRC) had grown to nearly four million words. On top of this, over the preceding 10 years, “there had been 4,428 changes to the code…more than one a day. I don’t care how many hours of continuing education you take, there’s no human way you can keep up with this.

Even the IRS doesn’t get it right. According to the Institute for Justice, a recent TIGTA study on the accuracy of answers provided by IRS employees to consumers “found varying error rates depending on how taxpayers contacted the IRS.” 86% of the consumers who called the IRS Helpline got the right answer, but questions that were emailed were answered correctly just 64% of the time. A previous study of the responses given to 500,000 taxpayers who stopped by IRS tax help centers found that “only 45% of questions were correctly and completely answered.”

So here’s my radical solution: simplify the tax code!

Oh, I forgot. Those powerful lobbyists for attorneys and CPAs will never let this happen.

Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.

Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.